Crisis threatens to widen Europe’s east-west divide

While Asian economies recovered from the financial crisis in the 1990s by exporting their way out of recession, the export outlook in the former Eastern bloc does not look promising

By Dan Bilefsky / NY TIMES NEWS SERVICE , PRAGUE

The owner of some of the Czech capital’s chic restaurants unveiled a novel approach this week to lure business clients to one of his upscale dining rooms: Let diners pay what they like.

The owner, Sanjiv Suri, hopes executives will not want to appear cheap to their guests when presented with a blank check after dining at the lunch buffet, laden with grilled vegetables instead of foie gras. Even if they pay nothing, he added, they will almost certainly return as paying customers.

“During an economic crisis you need to be creative,” Suri said, sipping pinot noir in a half-empty dining room.

Breaching the old adage that there is “no such thing as a free lunch” is just the latest tell-tale sign that the financial crisis has reached Eastern Europe, even in a relatively resilient economy like the Czech Republic’s. As exports to Western Europe — its biggest market — begin to falter, companies are scaling back. Unemployment is starting to rise, hitting 6.8 percent last month, versus 6 percent a year earlier. The country’s GDP is expected to contract by about 0.3 percent this year, the Czech National Bank said this week, after growing about 4 percent last year.

How bad it gets remains to be seen. Czech optimists say that they should fare better than countries to the east, which are far more dependent on loans from Western banks and have less developed economies. Indeed, the crisis threatens to widen the economic divide within Eastern Europe, as richer, well-run countries like the Czech Republic better withstand the downturn, leaving weaker peers further behind.

“The disaster spotlight is now being pointed at east and central Europe,” said Gernot Mittendorfer, the Austrian chief executive of Ceska Sporitelna, a large Czech bank owned by the Erste Group of Austria.“But panicked investors are wrongly lumping all of the countries in this region together, and the reality is that there is not widespread rot,” he said.

The most vulnerable are the newer states. Moody’s Investors Service warned in a report last week that western owners of East European banks are coming under pressure to withdraw capital from countries already reeling from budget deficits and foreign borrowing. The countries most at risk, the report said, are the Balkan countries, Hungary, Croatia and Romania.

While Asian economies recovered fairly quickly from the 1990s financial crisis by exporting their way out of recession, the export outlook does not look promising. Demand for goods is plummeting almost everywhere in the world.

Here in the Czech Republic, the problem hit home last week after foreign guest workers, who filled manufacturing jobs during the boom years, were offered free airline tickets and a 500 euro (US$637) allowance to go home.

Few economists expect the region to avoid the recession rippling around the world. Nonetheless, Mittendorfer said, panic is not justified. The financial perils in places like Ukraine, he said, are not inextricably linked with wealthier, better-managed economies like the Czech Republic, Slovakia or Poland, which are already in the EU.

Indeed, while emerging European markets need to repay more than US$400 billion in short-term debt this year, a recent UBS report said that more than half this debt was held by relatively resilient economies like the Czech Republic.